Friday, February 28, 2014

Yet another article on why an economics major is awesome! This time from the Wall Street Journal [HT: Marc Hellman]. Why? Well corporations are waking up to the value of the economist's skill in analyzing data and, in a world of big data, are beginning to respond by hiring economists in droves.

From the article:

With more data available than ever before and markets increasingly unpredictable, U.S. companies—from manufacturers to banks and pharmaceutical companies—are expanding their corporate economist staffs. The number of private-sector economists surged 57% to 8,680 in 2012 from 5,510 in 2009, according to the Bureau of Labor Statistics. In 2012, Wells Fargo & Co. had one economist in its corporate economics department. Now, it has six.

"A lot of companies have programmers who are able to process big data," said Tom Beers, executive director of the National Association for Business Economics in Washington, a professional organization with about 2,400 members. "But to find a causality between two things and draw a conclusion really takes somebody with an economics background."

So, what are you waiting for? Oregon State has an awesome major with four options (including managerial for those interested in business economics) as well as an on-line major that you can do entirely in your underwear! Awesome! (I just took my boys to the Lego Movie so excuse all the 'awesome's...)

Wednesday, February 26, 2014

Fred Thompson checks in again with the second of a two-part post on the minimum wage. Part I was posted yesterday.

THE CBO
REPORT AND THE MINIMUM WAGE II

One big difference between the CBO report and how
the CEA spins it is that CBO emphasizes that a minimum-wage hike has costs. To
put it another way, the minimum wage is like a tax on low-wage work; as is
generally the case, when you tax something you get less of it, but as with any other
tax, some folks are also left with less money in their pockets. Figure 2 (in my
previous post) shows that the costs to those who purchase low-wage work, either
directly as employers (through reduced profits) or indirectly as consumers (by
paying higher prices for the stuff made using low-wage labor), is A+B or .5*(16.5 million +17 million)*(2000*$2.50) or $83.75 billion.The net loss is therefore B+D.In other words, the losers lose more than the
winners gain, $8.75 billion more, which, as the CBO emphasizes, is in this
context a fairly small number (about what it would cost to buy 40 F-35s).

Besides, it is in the nature of transfer programs,
no matter how they are financed to take in more than they hand out. Economists
call this difference ‘the leaky-bucket ratio.” According to the CBO, the
minimum wage’s leaky-bucket ratio is nearly as good as the Earned Income Tax
Credit’s – it’s associated with greater allocative inefficiency, but is also
relatively less costly to administer. It only costs the losers about $1.10-$1.15
to transfer a dollar to a low-wage worker via the minimum wage.

Nevertheless, the CBO also reminds us that less than
20 percent of low-wage workers are from poor (below the federal poverty line)
households, which means that if what we are concerned about is how much it costs
us to transfer a dollar to a poor family (rather than to a low-wage worker) via
the minimum wage, the leaky-bucket ratio is not nine percent but more like 80
or 90 percent, which is distinctly inferior to the EITC.

The CBO also emphasizes that who bears the burden of
the minimum wage matters in two distinctly different ways: its effect on the
demand for low-wage workers (negative) and its effect on aggregate demand
(positive). In both instances, how much depends on whether its burden is
shifted back to the owners of the enterprises that hire minimum wage workers
(lower profits) or forward to consumers (higher product prices). This is
important to an assessment of the employment effect of a minimum-wage hike,
because if most of the tax is shifted forward to consumers, the effect will be
small; at the same time, consumption taxes tend to be pretty regressive, if
minimum wage hikes are entirely shifted forward to consumers in higher prices,
the pockets of the families from whom the cash is taken won’t on average be very
much deeper than those to whom it is given.

In contrast, business owners tend to have much
deeper pockets than the families of minimum-wage workers. If minimum wage hikes
come out of profits, they would have the net effect of transferring cash to
folks with a much higher propensity to spend it, thus significantly increasing
aggregate demand. Unfortunately, they would also result in a lot of low-wage job
losses.

The CBO’s analysis finds that about ¾ of the cost of
a minimum wage hike will be shifted forward to consumers in the form of higher
prices and about ¼ back to profits, which is how they come to the conclusion
that the low-wage job losses from a big jump in the minimum wage will be relatively
small. At the same time, this finding is also consistent with the conclusion
the distributional burden of a minimum-wage hike will be approximately
proportional to income, which is significantly but not hugely different from
the distribution of households supplying low-wage workers (see the CEA’s point
2 above, for the magnitudes at issue). Hence, the CBO concludes that boosting
the minimum wage tends to increase aggregate demand, but only slightly.

The one kicker goes to the minimum wage’s effect on
labor supply and how subsequent minimum wage jobs will be rationed. This could
actually go either way: higher wages lead to lower turnover, reducing the
amount employers must spend recruiting and training new employees. Paying
workers more can also improve motivation, morale, focus, and health, all of
which can make workers more productive. In addition, business owners can adjust
in ways other than reducing low employment – for example, the CEA mentions
accepting lower profits, although replacing low-wage workers with capital or
higher skilled workers seems more likely, and would be easy to do if a higher
minimum wage induced more higher-skilled workers to seek minimum wage jobs.

Finally, the CBO report
looks at the effects of a higher minimum wage on the wages of folks who are already
earning more than the proposed minimum wage. Many of those folks can expect to
see their wages bumped up. The question is, how much? The study referenced by the CEA simply
assumed that the gain to above-the-proposed-minimum-wage workers would be equal
to the gain accruing to those below the proposed minimum wage. In contrast, the
CBO used the variation in state minimum wages – half of America’s workers live
in states where the minimum wage is equal to the federal minimum, $7.25; a fourth
live in states where it’s $8.01 or higher; and a fourth live in states where
it’s somewhere in the middle – to suss out the size of the effect on those above
the proposed federal $10.10 level. It concluded that the effect would be about
half of the difference between the proposed level and the state’s current
minimum, or about $30 billion altogether.

The
CBO report is a great illustration of how state policies serve as laboratories of public
policy. Nearly every finding in the report is based upon quantitative
comparative analysis of how effects vary as a consequence of different minimums
across states and over time. As an economist, with an intellectual interest in
this issue, I cannot help but wish that Washington State would soon adopt a $15
per hour minimum wage. I’d really like to see what would happen. As a citizen
of Oregon, I’d prefer to learn from someone else’s experience.

Tuesday, February 25, 2014

Fred Thompson checks in again with a two-part post on the minimum wage. Part II will post tomorrow.

THE CBO
REPORT AND THE MINIMUM WAGE I

This Blog has, over time,
paid a lot of attention to the minimumwage, arguably more attention than the issue deserves,
given that the effects of changing it are small, mostly invisible or somewhat benign.
Of course, as the owner of Oregon Economics, Patrick Emerson, observes, the
issue is of special interest to Oregonians. The Pacific Northwest already has
the highest state minimums in the land and Washington’s Governor Jay Inslee and
Oregon’s Labor Commissioner Brad Avakian are calling for further increases.
Then too, there’s the SeaTac initiative, which raised the minimum wage to $15 an hour for the airport’s
hospitality and transportation workers, and Mayor Ed Murray's push to extend
the $15 minimum to Seattle.

Ds
often try to push the issue onto the national legislative agenda in midterm
election years. President Obama kicked off this year’s campaign in his State of
the Union message, when he called for “a fair wage of at least $10.10 an hour.”
Minimum wages are popular with voters and many Ds and their constituents really
want to see them increased. The looming election, with its focus on legislative
races, greatly boosts the likelihood of enacting an increase. Besides, the
minimum wage is an effective wedge issue, distinguishing Ds from Rs.
Politically, this is a win-win issue for Ds.

Figure 1: US Minimum Wage History

Consequently,
you can expect to hear plenty from both Ds and Rs about a report recently
issued by the nonpartisan Congressional Budget Office (CBO). It found that a
national minimum-wage hike would bump up earnings for 16.5 million people and
cost 500,000 low-wage workers their jobs. In other words, a minimum-wage hike
will help a lot of low-wage workers and hurt a few.

This is how the President’s
Council of Economic Advisers (CEA) spins the report:

1. CBO
finds that raising the minimum wage to $10.10 per hour would directly benefit
16.5 million workers.

2. CBO
finds that raising the minimum wage would increase income for millions of
middle-class families, on net, even after accounting for its estimates of job
losses.Middle
class families earning less than six times the poverty line (i.e., $150,000 for
a family of four in 2016) would see an aggregate increase of $19 billion in
additional wages, with more than 90 percent of that increase going to families
earning less than three times the Federal poverty line (i.e., $75,000 for a
family of four in 2016).

3. CBO
finds that this wage increase would help the economy, injecting about $150 billion into the economy each year. (Note, this is not exactly
what CBO said. The $150 million dollar figure comes from another study entirely, one which makes
some pretty bizarre assumptions. What the CBO said is that raising the minimum
wage will probably increase aggregate demand slightly
“because the families that experience increases in income tend to raise their
consumption more than the families that experience decreases in income tend to
reduce their consumption” and only in the near term.)

4. CBO
also found that raising the minimum wage would lift 900,000 people out of
poverty and that only 12 percent of the workers likely to
benefit from a minimum-wage increase are teenagers.

The
CEA then goes on to pooh-pooh the CBO’s claims that a minimum-wage hike would
probably cost about 500 thousand low-wage jobs, based primarily on a poll of
eminent economists showing 80 percent of them think that boosting the minimum
wage is a good idea. The CEA simply dismisses the evidence that minimum wage
hikes increase welfare dependence or that less-educated single mothers are the
folks most likely to be hurt by a minimum wage increase.

So,
what does the CBO report actually say, aside from agreeing that a minimum-wage
hike is on balance an OK idea? To answer that question I will show some simple
analysis and a few numbers. (Note, I’m simplifying the CBO’s analysis a lot, by
ignoring states with minimums higher than the national standard, lumping the
folks earning more than their state’s current minimum wage but less than the
proposed new minimum in with those now earning minimum wages, adjusting start
and end points to produce approximately the same sums as the CBO, and assuming
the supply of low-wage labor is fixed – doesn’t vary with the wage offered. The
supply assumption is clearly counterfactual, but it makes for the strongest
possible case for the minimum wage.) My take on the CBO report is depicted in
Figure 2.

Figure 2: Effect of a Minimum-Wage Hike from $7.50 to
$10

The
CBO reports (I’ll get to how they got there in my next post) that the demand
for low-wage labor is quite inelastic (doesn’t vary very much when the minimum
wage goes up). This conclusion is reflected in Figure 2 by the line labeled ‘D,’ which shows that increasing the minimum wage
by a third (from $7.50 to $10) reduces low wage employment by about 3 percent
(from 17 million to 16.5 million). In
this case, the net gain to low-wage-workers would be area labeled A less the
area D, or 16.5 million*(2,000*$2.50) less .5 million (2000*$7.50), which is,
$75 billion (here I’ve used 2,000 hours a year as an estimate of full-time
work).

Monday, February 17, 2014

Oy. This is a puzzle to me, but perhaps not to public health folks out there who can shed light: Oregon is really bad in vaccination rates for kids as shown in this graphic by Mother Jones:

They look at how easy it is to get vaccination exemptions from the state, and Oregon is rated ion the middle. So, is it our childhood poverty rate, a cultural artifact, poor public health infrastructure...what?

We need to rebuild
our infrastructure, and now is the perfect time to do it. Interest rates are at
historic lows, but they are unlikely to stay there forever...

But infrastructure
budgets have been cut, not expanded. Why? One reason is that in the race to cut
the deficit, infrastructure spending has been lumped in with other types of
spending. That is a tragic mistake. Unlike government “transfers,” which simply
take money from person A and give it to person B, infrastructure leaves us with
something that helps the private sector do business, and thus boosts our GDP
growth. Infrastructure is a small percentage of overall federal spending, but
tends to be a politically easy target.

One idea to boost
infrastructure spending, therefore, is to treat government investments
differently from other kinds of government spending by having a separate
capital budget.

This
grabbed my attention. We all have our manias. Mine is infrastructure
investment, especially our inability to make large-scale infrastructure
investments, which reduces economic growth and, based on studies by Duflo and Pande and Lipscomb et al., may increase poverty. For me the issue isn’t limited
to public investment. We strangle all sorts of large-scale infrastructure
investments. Here, the poster child is Keystone XL. Recently, the U.S. State Department’s final
environmental review of the proposed Keystone XL pipeline was released for
comment. It concludes that Keystone XL would have little or no effect on the
rate of extraction of oil sands or on the consumption of oil, that its main
effect would be to increase the safety with which that oil is moved about (a
little) and its efficiency (a lot), and implies that the opposition to this
good thing is largely symbolic. The report’s basic economic argument is that,
even if the oil from the tar sands were shipped by rail, its cost would still
be less than the current or expected future prices. Consequently, building the
pipeline won’t affect the marginal price/cost of oil and, therefore, final
supply or demand.

As
I see it. The main thing that is strangling large-scale infrastructure
investment is that we have politicized these decisions in a system of
governance that is highly biased in favor of the status quo. So far as public
investment is concerned, the big problem seems to be an inability to manage IT
and ICT investments. Even so, granting those claims, wouldn’t it make sense “to
treat government investments differently from other kinds of government
spending by having a separate capital budget”? Of course it would and, for the
most part, we do. More than 80 percent of the US’ nonmilitary public
infrastructure is owned by state and local governments. This means that, if we
have insufficient public infrastructure, it’s primarily a state and local matter.
Most state and local governments already
have separate capital budgets.

(Parenthetically,
it might be mentioned that the Feds offset the presumed budgetary bias against
investment projects by annualizing capital costs in authorizing ‘bricks and
mortar’ projects and in appropriating funds for them.)

Therefore,
let’s come down to the level where it matters, Oregon, and to an infrastructure
issue I know something about, highways. Analysts at the Department of
Transportation (DOT – and more disinterested bodies, like the Oregon Transportation Research and Education
Consortium –
OTREC) are quite concerned about the sustainability of our highway
transportation network. They believe that the social returns on certain kinds
of highway investments are quite high: maintenance, > 35 percent; projects
oriented to reducing urban congestion, > 15 percent, etc. In contrast,
ignoring effects on aggregate demand, most other highway projects produce
relatively low or negative returns. Because the lion’s share of state money
goes to maintenance, this evidence is entirely consistent with the conclusion
that we ought to be investing more and that now is a very good time to make
such investments (in addition to low borrowing costs, the state doesn’t have to
bid fully employed resources away from the private sector). Moreover, the
relatively high payoff to the maintenance portion of the DOT budget tends to
reinforce Noah Smith’s argument: maintenance seems to be where we are
under-spending the most and maintenance spending is usually charged to the
current account rather than to the capital account.

Nevertheless, there are a couple
of policy issues that are probably more salient than is budget format to fixing
infrastructure problems. In the first place, maintenance investment is far less
risky and seems to have higher expected rates of return than other highway
investments, but gets little or no federal matching, while new construction
projects get treated pretty generously by the Feds: about 80 percent of the
cost of a project (up to some predetermined limit, then none of the costs, so
that the state bears most of the risk of cost overruns, which tend to be high
for investments that break new ground, whether literally or figuratively). The
solution seems obvious, shift federal transportation subsidies to a
formula-based grant, which is how most states allocate motor fuel taxes to
local jurisdictions. At the very least, federal matching shares should probably
be lowered for new construction and raised for highway maintenance.

Second, highway engineers tell us that road wear is a cubic function of
axle weight and a quadratic function of road speed. Oregon’s weight-use-mile
tax, imposed on commercial vehicles, approximates the damage they do to the
highways (and also provides a very real incentive to reduce axle weight and to
comply with the 55 mph speed limit on trucks, thereby, also reducing highway
maintenance costs). The gas tax once did pretty much the same thing for private
vehicles, insofar as speed and vehicle weight were the principal determinants
of fuel consumption. However, the legislature’s consistent failure to raise motor
fuel taxes in tandem with construction costs, together with reduced private
driving and the shift to more fuel-efficient cars, has depleted the state’s
highway fund (it has also increased uncertainty about the benefits of new
highway construction and, therefore, the riskiness of these projects, which was
already high on the cost side). The solution to this problem lies in increasing
revenue.

Currently, Oregon’s DOT is
experimenting with GPS systems that would monitor how and when vehicles use the
highways and allow the state to bill their owners directly for the road damage
their vehicles cause. This would permit revenue from highway x to be devoted to
maintaining highway x, and give DOT a better guide to allocating funds for new
construction. Furthermore, these charges could be varied by time of day or
week, thereby lessening congestion, further reducing the need for new
construction. It might make sense to delay most new, large-scale highway
construction projects in the state, especially those justified by high
congestion costs, until we see how these experiments play out – technically and
politically. A moratorium on new construction would also free up a little more
money for maintenance projects.

Finally,
there is one other point that should be borne in mind: most of the benefits to
infrastructure investments accrue directly to users or indirectly to their
customers (or their customer’s customers). Insofar as highways are concerned,
these benefits accrue about equally to private automobile operators and
commercial freight handlers (and/or their customers). If public investment really does produce returns of 20-30
percent, one would expect producers of primary products, manufacturers and
freight handlers to be clamoring for the state to impose taxes or float bonds
to upgrade roads and highways. The effect on business profits would be high and
the cost to business low. They are not or, at least, I don’t hear the clamor.
What I hear the business lobby saying is that tax rates (and regulatory burdens)
are too high, not that public investment is too low. If that’s what business
owners and their employees truly believe, perhaps, it might be wise to treat
claims about high payoffs to infrastructure investments (especially risky, big
new projects) with a modicum of skepticism.

Thursday, February 6, 2014

OSU Closed today, luckily I was only a few blocks from home when I got the call about the closure. Thank you OSU admin for making the call early this time. This winter is officially the weirdest ever...

Wednesday, February 5, 2014

An interesting proposal to study the idea of making community college free to all Oregon students is making its way through the legislature. This is just to study the idea but a few caveats come immediately to mind.

One, shouldn't this benefit be means tested? Wouldn't the better policy be to target low income households? It is not clear to me that we have to incentivize high income households to send their kids to college.

Two, this raises the opportunity cost of starting at a four year college. Under this plan, the wise college degree aspirant would go to CC for two years and transfer. To know if this is a good thing we'd want to know more about the relative success of such a plan in four year degree outcomes. This might also have a significant impact on Oregon's public four year universities.

Three, whether it significantly improves the high school graduation rates in Oregon which is, I presume, one of the main policy goals.

Tuesday, February 4, 2014

There are two kinds of tax
buffs: monomaniacs and standpatters. The monomaniacs want to replace existing
taxes with some theoretically superior, often untried alternative: land taxes,
consumption taxes, or increasingly these days, wealth taxes. The standpatters
generally believe that existing taxes, whatever they are, are pretty much OK,
although they might allow for some tinkering at the margins. I am pretty much a
standpatter.

Carbon taxes, however, simply
make too much sense to be ignored, even by a standpatter like me. Taxes are
generally nasty. When you tax something, you get less of it. Most of the things
we tax are good things: employment, savings, investment, consumption, etc.
Taxing them means that we get less of these good things. But Pollution is a bad
thing. As Dale Jorgenson, Richard Goettle, Mun Ho, and Peter Wilcoxen explain
in their book Double Dividend:
Environmental Taxes and Fiscal Reform in the United States, taxing
pollution means you get less of the bad stuff and, at the same times, get
revenue that can be used to reduce the nastiness of the existing tax system.
Moreover, the authors of Double Dividend
don’t rest their case on this obvious point, they simulate the effects of
environmental taxes on the U.S. economy using a highly plausible model that takes
account of the heterogeneity of producers and consumers, as well as expectations
about future prices and policies, to show that environmental taxes can be made
to produce win-win outcomes for almost everybody in America.

Can we afford a carbon tax that
would properly address the climate change problem? Mikhail Golosov, John
Hassler, Per Krusell, and Aleh Tsyvinski, in an article forthcoming in Econometrica“Optimal Taxes on Fossil Fuel in General
Equilibrium,” make an equally plausible case that an optimal carbon tax would
not seriously threaten economic growth. That, indeed, it would be no higher
than the current carbon tax rate in Sweden, for example.

On Thursday, February 6,
from 5-7 PM, I’ll be attending a panel discussion on “Should Oregon Take the
Lead on Carbon Taxes?” The event is free and will be open to the public at Portland
State University, Smith Memorial Student Union, Room 296/298. Participants will
include: Michael Armstrong, Senior Sustainability Manager, City of Portland
Bureau of Planning and Sustainability, Yoram Bauman, Standup Economist, Carbon
Tax Expert, and Former Lecturer, University of Washington, Jackie Dingfelder,
Former Oregon State Senator and Portland State University Ph.D. Candidate and
Jenny Liu, Assistant Professor of Urban Studies and Planning and Assistant
Director, Northwest Economic Research Center, Portland State University. I hope
to see you there.

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This blog seeks to comment on economic issues that matter to the state of Oregon. These issues may be local, state or national but in some way matter to Oregon and Oregonians. The goal of this blog is to eschew politics as much as possible and give an economist's perspective on economics and public policy as it relates to Oregon.

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